Close Brothers’ (CBG) prudent approach to lending has worked wonders for its shares' attributes as an income play. In the past, Close has safeguarded its dividend-paying potential by becoming more selective in its lending at times of greater competition. This pulling-in-the-horns strategy is once again at play and seems to be paying off. Not only is the lender's net interest margin proving stable at a time when rivals are suffering, but its banking business generated a healthy return on equity of above 20 per cent last year (17 per cent for the business as a whole). Meanwhile, regulatory capital levels remain ahead of management’s target. That bodes well for the attractive dividend, which has never been cut since the shares listed on London’s main market in 1984, not even during the depths of the credit crisis.
Shares trading below historical average
Dividend never cut
Stable net interest margin
Impairments low
Exposed to property downturn
Asset and motor finance competition
The core banking division, which accounted for 83 per cent of group profit last year, has driven loan book growth in recent years by focusing on commercial and property lending. The latter enjoyed the biggest rise last year at 12 per cent, helping boost overall lending balances by 6 per cent to £7.3bn. Property lending caters to specialist residential developers of new-build family housing. Admittedly, around 70 per cent of the portfolio is in London and the south-east of England, regions that have suffered some slowdown in house price growth during the past 12 months. However, new business has been written at a conservative average loan-to-value ratio of between 50 and 60 per cent. What’s more, impairments were at historically low levels last year of 0.2 per cent of the average loan book.
The asset and motor finance markets have become increasingly competitive, exacerbated by the influx of cheaper funding via the Bank of England’s Term Funding Scheme. However, Close Brothers has prioritised credit quality. Asset finance picked up last year, rising 2.7 per cent, while motor finance balances dipped by 1.5 per cent. Importantly, maintaining a prudent lending approach meant the net interest margin for the banking business was maintained at 8 per cent, in line with 8.1 per cent reported in the prior year. The margin has remained broadly steady during the first quarter against 1.9 per cent lending growth.
The robustness of Close Brothers’ lending operations was reflected in its performance during the financial crisis. Not only was the group able to break with peers and maintain the dividend payments, but banking recorded a relatively modest fall in return on equity to a low of 12 per cent in 2009. The prudence of Close as a lender is also reflected in the fact it has one of the lowest tangible asset-to-equity ratios (a key measure of balance sheet leverage for banks) among mainstream and alternative lenders at just 8.8. What’s more, throughout the past five years the dividend has been more than twice covered by statutory earnings – 2.2 times last year.
| CLOSE BROTHERS (CBG) | ||||
| ORD PRICE: | 1,490p | MARKET VALUE: | £2.25bn | |
| TOUCH: | 1,489-1,491p | 12-MONTH HIGH: | 1,682p | LOW: 1,317p |
| FW DIVIDEND YIELD: | 4.5% | FW PE RATIO: | 10 | |
| NET ASSET VALUE: | 891p | LEVERAGE: | 8.8 | |
| Year to 31 Jul | Total operating income (£m) | Pre-tax profit (£m) | Earnings per share (p)* | Dividend per share (p)* |
| 2016 | 687 | 234 | 127 | 57 |
| 2017 | 761 | 269 | 133 | 60 |
| 2018 | 806 | 279 | 139 | 63 |
| 2019* | 852 | 291 | 144 | 65 |
| 2020* | 896 | 298 | 149 | 67 |
| % change | +5 | +2 | +3 | +3 |
| NMS: | 1,500 | |||
| BETA: | 0.83 | |||
| *Shore Capital forecasts, adjusted PTP and EPS figures | ||||
